Your Funding Mix Is Moving While Your Loan Rate Stands Still

Three people, three answers, one mispricing that accumulates silently across the life of every fixed-rate loan the bank writes

Ask three people at the same bank what the wholesale funding share is, and you will get three different answers. The balance-sheet manager says 21%. The origination desk says 23%. Treasury says 40%. All three are right. They are answering different questions — and confusing them misprices every loan the bank writes.

This is not a rounding dispute or a disagreement about methodology. Each number describes a genuinely different slice of reality. The problem is that only one of the three belongs in the cost of funds, and the wrong choice propagates through the transfer price, through the loan rate, and into the P&L — silently, year after year, until someone finally reconciles the numbers and finds the gap.

What follows traces the mispricing from its source (three definitions of "the mix") through the mechanics that make it worse over time (growth, turnover, cohort drift) to the quiet trap that lets it accumulate (a flat charge applied to a moving target). Every number comes from a single illustrative institution — call it Avelmont — with a balance sheet simple enough to see every moving part.

Three definitions of "the mix" — and why each exists

The confusion starts because the word "mix" is doing three jobs at once, and nobody pauses to say which one they mean.

Whole-sheet mix: 21%

Total wholesale liabilities divided by total liabilities. This is where the bank stands today, across every vintage, every product, every business line. It is the number that appears in the annual report, the number the rating agencies cite, and the number the regulator compares against peers. It tells you the bank's aggregate dependence on market funding. What it does not tell you is what funds the next loan. A 20-year mortgage booked in 2014 still sits in that denominator. Its funding was settled long ago. Pricing a new loan off the whole-sheet share is like setting the thermostat based on last year's average temperature.

New-book mix: 23%

This is the share of wholesale funding in the incremental funding pool — the cohort that today's new origination actually draws on. It strips out the legacy book and asks: of the marginal money the bank deploys this year, how much comes from deposits and how much from wholesale? This is the pricing input. The new loan's cost of funds should reflect the sources that actually fund it, not the sources that funded loans written a decade ago.

Gross issuance mix: 40%

This is what Treasury actually raises over the course of a year, counting every tranche it issues — including the ones that simply replace maturing paper. A three-month certificate of deposit rolls four times a year. Each roll counts as a new issuance event. A five-year term deposit, by contrast, sits untouched. So wholesale paper, because it tends to be shorter and rolls more often, appears in the gross issuance calendar far more heavily than its weight in the standing balance. Treasury's 40% is real — it reflects the operational burden of keeping the wholesale machine running. But it is not the pricing input. It overstates the share because it conflates turnover with weight.

Why does issuance overstate the wholesale share so dramatically? Because wholesale money is short. A three-month tranche matures and must be replaced four times in a single year. Each replacement is a new issuance event. Meanwhile, a five-year term deposit sits on the balance sheet untouched, contributing nothing to the issuance calendar despite carrying real weight in the standing book. So the issuance mix inflates the wholesale share by the ratio of its turnover to the balance-sheet average — roughly a factor of two in Avelmont's case.

The rule that resolves the confusion is short enough to fit on a sticky note: issue on the turnover, price on the balance. Treasury plans its calendar using the issuance mix. The transfer price reads the balance mix. Swapping the two is the single most common funding-mix error in practice, and it usually overstates the wholesale cost by 30–50 bps.

Turnover rates vs. maturity dates

The word "maturity" is deceptive. It tells you when a contract expires. It does not tell you how much of the balance actually needs to be refinanced each year — and refinancing is what drives funding pressure. A 20-year mortgage and a 5.5-year corporate bullet have very different contract dates, yet they can exert surprisingly similar funding demands. The reason is amortization.

Consider Avelmont's credit book:

The mortgage has a 20-year contractual maturity, but it amortizes — every month, a slice of principal is repaid. By year 10, the outstanding balance has roughly halved. That means roughly 10% of the original notional turns over each year, requiring fresh funding or releasing capacity. The corporate bullet, by contrast, sits at full notional for 5.5 years and then refinances all at once. Its annual turnover is 18% — not dramatically different from the mortgage's 10%, despite a maturity that is less than a third as long.

This is the insight that turnover captures and maturity misses: what actually needs to be refinanced, not what the contract says. An amortizing loan releases funding gradually. A bullet loan hoards it until maturity and then demands it all at once. Turnover counts the funding events. Maturity counts the calendar.

The blended figure — 20.6% of the credit book turning over annually — tells Treasury how much replacement funding the asset side demands each year, irrespective of contractual dates. It is this number, not the weighted-average maturity, that should drive the funding plan.

The growth dial

So far the mix has been static: 23% wholesale in the new book, measured today. But the mix does not stay at 23%. It moves — and the direction it moves depends on a single, unavoidable piece of arithmetic: how fast the loan book grows relative to the deposit franchise.

At Avelmont, the loan book grows at 8% per year. Deposits grow at 5%. The gap between the two must be filled by wholesale funding. There is no third option. Every dollar of loan growth that deposits cannot cover is a dollar that wholesale must supply.

The numbers tell a clear story. Year 1: wholesale at 23%. Year 3: 28%. Year 5: 32%. The wholesale share rises by roughly nine percentage points over five years, driven entirely by the growth differential. No one chose this outcome. No committee voted for it. It is the default trajectory of a bank whose loan book outgrows its deposit franchise.

The sensitivity is steep: roughly a 4:1 ratio. For every additional percentage point of book growth above deposit growth, the wholesale share rises by about four percentage points over five years. An 8% book against 5% deposits produces a 9-point drift. A 10% book against the same deposits would produce something closer to 17 points.

Can the bank hold the mix flat? Of course — but only by deliberate policy. Slow the book. Grow deposits faster. Raise equity. Each option has its own cost and its own constraint. What the bank cannot do is grow the book at 8%, grow deposits at 5%, and pretend the wholesale share stays at 23%. That is not a policy choice — it is a denial of arithmetic.

The cohort concept — same plan, different vintages

Here is where the static view of the mix breaks down completely. A loan written today and a loan written in year 5 are originated under the same business plan, by the same bank, through the same channels. But they enter different funding environments. The mix that funds them is not the same mix.

Think of each origination year as a vintage, or a cohort. Today's cohort sees 23% wholesale in its first year of life. Year 5's cohort sees 32% wholesale in its first year of life — because by then, five years of growth differential have shifted the balance. Same plan, same bank, different cohort. The cost of funds is different for each.

This has a direct consequence for pricing. The transfer price must reflect the cohort the loan actually enters, not the cohort that existed when the pricing model was last updated. A pricing model calibrated to Year 1's 23% and never recalibrated will underprice every loan originated in Years 2 through 5, by an amount that grows with each passing year.

The cohort concept is not theoretical. It is the mechanism by which the growth dial reaches the individual loan. The bank's business plan produces a trajectory of wholesale shares. Each point on that trajectory defines a cohort. Each cohort has its own cost of funds. And the transfer price, if it is honest, must walk the trajectory alongside the plan — not freeze at the starting point.

The dashed-line trap

And here is where the mispricing actually lives. Not in a deliberate choice, not in a policy decision, but in a default that nobody questioned: the transfer price charges today's mix — 23% — flat across all five years of the loan's life.

In year 1, that is roughly right. The loan draws on a pool that is 23% wholesale. The charge matches reality. But by year 3, the actual mix has drifted to 28%. By year 5, it is 32%. The wholesale leg — which carries the rollover tail, the credit spread, and the liquidity premium — has grown by 40% relative to the origination mix. And the charge has not moved at all.

The shaded area between the dashed line and the rising curve is the mispricing. It is not large in any single quarter — perhaps 2 to 4 basis points of underpricing per year, depending on the wholesale spread. But it compounds. Over a 5-year loan, the cumulative undercharge can reach 10 to 15 basis points of spread that the bank absorbed without anyone approving the subsidy.

This is a mispricing that no one chose and no one owns. The origination desk did not decide to underprice. Treasury did not offer a discount. The pricing committee did not approve a subsidy. What happened is simpler and harder to fix: the mix drifted while the rate stood still. The transfer price was set at origination and never updated, because nobody's job description includes "re-read the funding mix each year and adjust the internal charge."

On a single loan, the amount is small. Across a portfolio of five-year paper, with new vintages entering every quarter, each one carrying its own unpriced drift, the aggregate subsidy becomes material. It accumulates in the gap between what the bank charges internally and what the funding actually costs — a gap that surfaces in Treasury's P&L as an unexplained drag, years after the loans were booked.

What happens when the franchise lags

The growth dial is not symmetric. Deposit franchise growth is bounded — by the branch network, by digital-adoption curves, by pricing competition from money-market funds and fintechs. A bank can spend heavily on deposits and still grow them at only 5%. The constraint is structural: the franchise grows at the rate its infrastructure and market position allow, not at the rate the balance sheet demands.

Loan book growth, by contrast, responds to ALCO mandates and market opportunity. When credit demand is strong and risk appetite is healthy, the book can grow at 8%, 10%, or faster. The asymmetry is baked in: the book can accelerate; the franchise resists.

When book outgrows franchise — which is the normal case for a growing bank — the wholesale share rises mechanically. No one has to make a bad decision. No one has to be careless. The arithmetic does the work. The transfer price, if it does not track the trajectory, falls behind.

The reverse case is rarer but instructive. When the franchise outgrows the book — perhaps because loan demand softens while the deposit base keeps compounding — the wholesale share falls. The cost of funds drops. And the franchise value rises, because the bank is funding more cheaply than it needs to. This is the scenario where the deposit franchise proves its worth: not as a line item, but as a buffer that absorbs funding pressure and converts it into margin.

The funding mix is ultimately a business-plan output, not a treasury input. It responds to decisions about origination targets, deposit pricing, branch strategy, and capital allocation. Treasury inherits the mix. It does not choose it.

This distinction matters for governance. If the mix is a treasury input, Treasury can be held accountable for its level. If the mix is a business-plan output — which it is — accountability belongs to whoever sets the growth targets. Charging Treasury for a mix it did not choose is a misattribution that distorts incentives and obscures the true cost of the bank's growth strategy.

The funding mix is not a number — it is a trajectory

Step back and consider what these pages have shown. Three people gave three answers because the word "mix" was doing three jobs. Only the new-book mix belongs in the cost of funds. That mix is not static — it moves with the business plan, responds to franchise growth, and drifts with every quarter that the book outgrows deposits. Turnover, not maturity, determines the funding pressure each asset segment exerts. And the cohort concept reveals that loans originated in different years face different mixes, even under the same plan.

A transfer price that freezes the mix at origination is a transfer price that silently accumulates mispricing. It charges year 1's reality to year 5's loan. It absorbs a subsidy that nobody approved. And it buries the cost in Treasury's residual, where it surfaces as an unexplained drag that auditors and controllers struggle to trace because the error was never discrete — it was continuous, a slow drift in a number that everyone assumed was fixed.

The fix is simple in principle, though it requires discipline in practice: re-read the mix at each cohort year, and let the price reflect the funding the loan will actually draw on — not the funding it drew on the day the spreadsheet was built. Update the wholesale share annually. Feed the updated share into the transfer price. Let each cohort carry its own cost. The numbers will not be the same from year to year, and that is exactly the point. They should not be the same, because the funding is not the same.

The dashed line is the comfortable choice. It stays flat, requires no recalibration, and produces a transfer price that never changes. The solid line is the honest choice. It moves, demands attention, and occasionally delivers bad news. But the solid line reflects reality. And reality, as every banker eventually discovers, has a way of catching up with the spreadsheet — usually at the worst possible moment, and always at a cost greater than the recalibration would have been.

The worked example uses Avelmont, a fictional institution, with illustrative parameters. The growth rates, mix shares, and basis-point estimates are for exposition only and will differ for any real bank. The underlying mechanics — the three definitions, the growth dial, the cohort drift, and the dashed-line trap — are general.